Rackspace Hosting Inc. announced the largest downsizing in its 19-year history Tuesday, cutting its total U.S. workforce by 6% and eliminating the jobs of about 200 people at its Windcrest headquarters.
The cuts are part of an effort to reduce spending by 7% companywide in 2017 following Rackspace’s acquisition by New York-based private equity firm Apollo Global Management LLC last year. According to a Rackspace spokesperson, jobs are being eliminated in parts of the business where the workforce has grown more rapidly than revenue.
Management met one-on-one Tuesday with Rackspace employees whose jobs were being eliminated. They will remain on the payroll, though not in the office, for one month for the purposes of continuing healthcare benefits and will be offered outplacement services. CEO Taylor Rhodes began leading companywide meetings with groups of Rackers on Monday night.
Before the cuts, the managed-cloud provider employed 3,300 people in San Antonio, 500 in Austin, and about 2,300 in other U.S. cities and in London, Sydney, Hong Kong and Munich. Rackspace is reducing its workforce in nearly every office, but at smaller rates. This is the first layoff of this size for the company, which experienced smaller layoffs about this time the last two years.
According to a Rackspace spokesperson, the job cuts are “top down,” with positions at the vice president and director levels reduced at three times greater than other levels.
“We were very intent on preserving as many Racker positions as possible in our customer-facing roles, and we’re confident we are not going to affect fanatical support for our customers,” the spokesperson said.
Since being taken private, Rackspace has been working to trim its annual budget by 7%, or $100 million, according to documents filed with the Securities and Exchange Commission.
“We felt that was very manageable, and while it’s always painful, it was also necessary because we want to be able to invest in fast-growing areas,” the spokesperson said. “We told the world our plan, the numbers, and Apollo pretty much left it up to us how to accomplish that.”
Rackspace formed a transformation management office, known as XMO, led by Rackspace leaders and consultants to determine where spending cuts could be made and identify savings before looking at workforce reductions.
While that effort shrank the potential number for layoffs, with Rackspace compensation costs at 60% of the budget, layoffs were inevitable.
In a blog post published on the company website today, Rhodes wrote, “In the months leading up to these layoffs, Rackers across our business worked persistently and creatively to trim as much spending as they could from areas other than headcount. I’ve been humbled to watch their efforts, and to see the personal warmth and practical help that all our Rackers are extending to our departing colleagues.”
City Manager Sheryl Sculley emailed the following response:
“The City of San Antonio is committed to assisting Rackspace with its Community Link program to retain the departing employees and keep their talents here in San Antonio. One of the lasting legacies of great companies like Rackspace is they bring top-notch talent to our community. The goal and challenge for us is to keep those bright minds in our city.”
County Kickstarts Chief Talent Officer
To help departing employees who want to stay in the community, Rackspace is offering outplacement support services that include Community Link, a partnership with LinkedIn, the City of San Antonio, and Bexar County. Rackspace is also partnering with local companies that hire IT engineers and support experts, and tech advocacy groups such as Tech Bloc in San Antonio.
Since last year, Tech Bloc CEO David Heard has been working to build public support for funding a chief talent officer position that would connect emerging tech companies with both homegrown and imported tech talent.
On Tuesday, Bexar County Commissioners approved his proposal for $20,000 in seed funding for the CTO position and program, a $300,000 initiative. The money will come from the County’s Innovation Fund.
“Our number one challenge in the tech industry is talent – recruiting talent, placing talent, locating good engineers, keeping them in San Antonio,” Heard told commissioners. “There are a lot of parts of our ecosystem that are important to building a tech sector, but the human capital is primary.
“Today’s investment is a quick-turn reaction to some near-term tactical corporate moves that are happening where we could see displaced workers and we see some opportunities to help link them to companies in town. That’s why we pulled for $20,000 in the overall project to get quick approval today so we could begin work immediately.”
The program will provide recruitment, outreach, and a information clearinghouse for people looking for work and to learn who’s hiring.
“The CTO position is going to be key,” Heard said.
Rackspace executive Dan Goodgame, who talked to the Rivard Report Tuesday, said: “We have some terrific people who are leaving. Those of us who know them, it makes your heart sink. But there are some great folks available [after the layoffs]. We’re hoping some local companies will snatch them up.”
Goodgame described Rackspace, like other tech companies, as having to “re-platform” every five years or so, because technology advances and customer needs change.
“You end up with your rate of workforce growth increasing faster than your revenues in some areas, and in the meantime, you have new businesses growing by the double-digits that we can’t feed fast enough,” he said.
The company’s fastest-growing line of business is currently support for Amazon Web Services, Microsoft Azure, and Rackspace managed security, divisions that Jeff Cotten, a former senior vice president at Rackspace, began heading up his new role as company president on Feb. 1.
Rhodes said Rackspace is a “growing, profitable company with excellent prospects.” Its leaders and owners expect that within a few years Rackspace will be “significantly larger in revenue, profit and headcount.”
At publication time, there were 97 positions advertised at Rackspace.jobs, with 56 located in the U.S. and many in support of the company’s Amazon Web Services business.